A company that produces a single product had a net operating income of $90,000 using variable costing and a net operating income of $125,750 using absorption costing. Total fixed manufacturing overhead was $58,650 and production was 11,500 units both this year and last year. Last year was the first year of operations. Between the beginning and the end of the year, the inventory level: (Do not round intermediate computation and round your final answer to nearest whole number.)

a. decreased by 7,010 units
b. increased by 7,010 units
c. increased by 35,750 units
d. decreased by 35,750 units

a. Decreased by 7010 units

Explanation:

Variable costing net operating income$ 90,000

Add manufacturing overhead costs

deferred in inventory under absorption

costing ($125,750-$90,000) $35,750

Deduct fixed manufacturing overhead costs released from inventory under absorption costingAbsorption costing net operating income $125,750

Fixed manufacturing overhead per unit = $58,650 ÷ 11,500 units = $5.1 per unit

Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in endinginventory − Fixed manufacturing overhead in beginning inventory$35,750= ($5.1 per unit × Units in ending inventory) − ($5.1 per unit × Units in beginning inventory)$35,750 = $5.1 per unit × (Units in ending inventory − Units in beginning inventory)(Units in ending inventory − Units in beginning inventory)

= $35,750÷ $5.1 per unit = 7,010 units

Option B, increased by 7,010 units is the correct answer

Explanation:

The profits under absorption costing of $125,750 is higher than the one recorded under variable costing of $90,000,this implies that more inventory items have been charged with fixed cost included in the closing value of inventory.

The fixed manufacturing overhead per unit=$58,650/11,500

                                                                         =$5.1

Invariably, each item of closing inventory under absorption costing has $5.1 of fixed cost included in it.

The difference between both methods' profit figures  $35,750 ($125,750-$90,000)

number of increase in closing inventory=difference in profit figures/fixed cost per  unit

number of increase in closing inventory=$35,750/$5.1

                                                                  =7,010